Hong Kong suffers worrying downgrade

Commentary: Sponsors shun city in decline

HONG KONG (MarketWatch) — Investors should worry less about another batch of weak economic numbers from Hong Kong and more about its future. It could be sliding into irrelevance, becoming just another second-tier Chinese city.

This week, attention in the city turned to golf as Rory McIlroy and other stars rolled into town for the UBS Hong Kong Open — one of the region’s oldest golf tournaments, dating back 54 years.

But that impressive history could be coming to an end. Unable to find a sponsor for next season, the tournament has lost its slot as a European Tour event — and might not even take place at all.

Normally, such a setback might be overlooked, but it comes at a time when Hong Kong is questioning its very raison d’être. Fifteen years after the territory’s handover from the U.K., the economy is flat-lining, the government is deeply unpopular, and society is divided like never before.

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And its relationship with mainland China — its giant neighbor and ultimate sovereign — is also under increasing strain.

Resentment is growing over the sense that, as integration between the two accelerate, the benefits are stacked in the mainland’s favor. While mainland Chinese visitors may enjoy duty-free shopping, hospital services or acquiring offshore property assets in Hong Kong, the feeling is that locals lose out.

Exacerbating these tensions is a reversal in the value of the two countries’ currencies. Historically, the Hong Kong dollar has traded at a premium to the mainland Chinese yuan, but now it trades at a chunky discount.

In recent years, the yuan has gained by a quarter against the Hong Kong dollar as Beijing has re-pegged its currency higher to the greenback. Hong Kong, however, has been told it has to retain its U.S. dollar peg, at least until China is ready to make its yuan currency fully convertible. Meantime, this inequitable currency match is stoking tensions, as it transfers wealth from Hong Kong.

As Hong Kong’s integration into the rest of China accelerates, Chinese mainlanders find bargains in everything from shopping to property to securing cheap financing. The opposite is true in Hong Kong: The deluge of mainland money pushes up prices and imports inflation, while a weak currency leaves people feeling poorer.

Now it seems, this reversal in the pecking order is also taking place in the golfing world. As Hong Kong faces relegation, mainland China’s stock is rising. Only two weeks earlier, HSBC hosted its Champions event just across the border at the Mission Hills golf club in Shenzhen. This came shortly after the big-budget Shanghai Masters, sponsored by BMW, which has been elevated to a European Tour event.

This might just be a reflection of the new order: Mainland China is where global brands can find growth in population and spending power, not in old Hong Kong.

Still, even if this is the harsh reality, surely there are plenty of wealthy local companies that could back to Hong Kong? It is also noteworthy that HSBC is happy to pour money into golf sponsorship elsewhere, but has apparently ruled out backing its Asian hometown. It also sponsors the LPGA HSBC Ladies Champions tournament, played in Hong Kong’s regional competitor Singapore.

This hurts. Not only is Hong Kong the first letter in HSBC, but in the first half of this year the bank also made a massive $3.76 billion — or 36% of its operating profit — from this city of 7 million. Together with its subsidiary Hang Seng Bank, the group has a huge market dominance, which helps to make Hong Kong a lucrative cash cow.

That said, there are clearly wider reasons sponsors are not rushing to write checks. The economy looks almost ex-growth. Third-quarter figures out on Friday showed growth edged up 0.6% quarter-on-quarter in the three months to September — better than the 0.1% contraction in the previous quarter, but still pretty woeful.

Recent governments have consistently underperformed. Singapore is smaller than Hong Kong but punches above its weight in attracting global sporting events such as Formula 1. In 2014 it will open a massive sports stadium complex to attract international events. Similar plans in Hong Kong never appear to get off the drawing board. Many suspect the administration is beholden to vested property interests.

Perhaps not surprisingly, Singapore is also stealing a march on Hong Kong as a favored regional headquarters hub. According to a new survey by the CPA of Australia, 59% said they would opt for the Lion City. The key factors going against Hong Kong were high property prices, a high cost of living and pollution.

These problems in Hong Kong are not new. But now we are seeing the wider costs of inaction in dealing with them.

This should be a wake-up call. Hong Kong needs to have a vision beyond being a costly free port for China, living off tax arbitrage.

Otherwise, it risks becoming a second-tier city that global businesses and sponsors can ignore.

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